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McCormick reports growth in Q3 sales, dip in earnings

McCormick & Co. Inc. saw earnings drop sharply in the third quarter, sending shares down more than 4 percent, in part because of lower profit in its Kohinoor business in India and declines in the Mexican peso.

The Sparks-based spice and flavorings maker, which reported results Thursday, also said it was faced with a higher tax rate in the three months ending Aug. 31 compared with the same period a year earlier.

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The company's income fell 20 percent to $97.6 million from $122.9 million in the third quarter of 2014, McCormick said. Per-share earnings dropped to 76 cents from 94 cents.

The company's shares closed at $78.68 each, down $3.50, on the New York Stock Exchange.

Because of lower profit and foreign currency impacts, the company expects profit for the year will be at the lower end of its projections of $3.47 to $3.54 per share. But sales will be at the higher end of projections, based on strong sales growth so far this year and the completion of three acquisitions that expand the company's global presence.

Acquisitions included Italian spice maker Drogheria & Alimentari for $97 million in February; Brand Aromatics, a New Jersey maker of marinades, for $63 million in March; and Stubb's barbecue sauces of Texas for $100 million in June.

"Overall we feel good about our performance this year and our ability to address these specific head winds," said Alan D. Wilson, chairman and CEO, in a conference call with analysts. "Our products are trending with today's consumers. People are exploring new flavorings and seeking fresh new ingredients."

Sales rose 2 percent in the recent quarter to $1.06 billion, up from $1.04 billion in the same period a year earlier, with growth in both the consumer and industrial sides of the business helped by new products, increased marketing and expanded distribution. Sales climbed 7 percent, excluding the impact of foreign currency rates.

Several analysts during the call raised concerns about McCormick's pricing strategy at U.S. retailers, where the company has been losing market share to smaller rivals. The company once counted on growing market share to set prices higher than some competitors, but that strategy may no longer be effective, said Brian Yarbrough, a consumer staples analyst for Edward Jones.

"There's some concern," about the ability to raise prices and grow earnings, he said. "For years, the company took market share and now is losing market share. … There's some concern they would have to lower prices. … The million-dollar question is: Can they raise prices and even gain market share or will ... volume fall off?"

Lawrence Kurzius, McCormick's chief operating officer, told analysts the brand is making progress in efforts to regain lost market share in its U.S. consumer business, gaining strength in its gourmet line of spices, recipe mixes and Skillet Sauces, with strong sales of Zatarains and Grill Mates products.

"The latest breakthrough is herb grinders … just starting to appear on shelves," Kurzius said. "We've created a significant opportunity … to convert customers who use fresh packaged herbs."

Responding to underperformance of its Kohinoor basmati rice business, McCormick announced a plan to get out of low-margin product lines in that brand and instead focus on existing and higher profit margin products. McCormick acquired the Indian business in 2011.

The spice maker also said it stepped up its cost reduction plans this year and is expecting to reach $95 million in savings, up more than a third from a record level last year. Some of the savings will go toward increased brand marketing this year.

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